Supporters call it "financial services reform." Yet one has to wonder what the Restoring American Financial Stability Act of 2010 is reforming or stabilizing. The House on Wednesday by a 237-192 margin passed the 2,300-plus-page conference bill designed to protect American households from predatory practices by banks, subprime lenders, brokerage houses and other intermediaries. But evidence suggests that if it becomes law, the bill instead will lay the groundwork for another major federal bailout. During House-Senate conference sessions, affirmative action zealots inserted a host of mandates to promote credit allocation by race. Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., the prime sponsors of this "comprehensive" bill, have refused to entertain legitimate objections. If the Senate approves the measure - it will begin debate in a couple weeks - Congress once more will have assigned institutional safety and soundness a lesser priority than achieving racial, ethnic and sexual "diversity."
More than anyone else, we have Rep. Maxine Waters, D-Calif. (in photo), to thank for this latest development. Waters, a member of the conference committee and the Congressional Black Caucus, has used her clout to ensure the final package delivers a cartload of favors to black and Hispanic mortgage borrowers and the lenders that cater to them. Investor's Business Daily recently surmised that in present form the bill "could have been written by ACORN [the Association of Community Organizations for Reform Now], and probably was." Rep. Waters' amendments reflect her longstanding zeal for socializing risk on behalf of her natural constituents. On a practical level, whites more than ever would be on the hook for foreclosed loans that shouldn't have been made in the first place.
The measure's key affirmative lending provisions underscore the extent to which banking in the U.S. has become politicized. It gives the U.S. Treasury the authority to liquidate banks that pose a threat to financial stability - a two-edged sword, actually, given the potential here for arbitrary bureaucratic discretion. At the same time it gives lenders a virtual free pass if black and other minority borrowers account for a large portion of their respective loan portfolios, especially in neighborhoods where they predominate. The bill states: "The orderly liquidation plan shall take into account actions to avoid or mitigate potential adverse effects on low-income, minority or underserved communities affected by the failure of the covered financial company." In other words, federal bank examiners should make every effort to keep a failing bank open so long as it underwrites mortgages to the very sorts of borrowers whose repayment record led to disaster in the first place!
There is more. The amended bill would create a Financial Stability Oversight Council headed by the Treasury Secretary to consider a struggling financial institution's "importance as a source of credit for low-income, minority or underserved communities" before any takeover. And the measure also would establish an Office of Minority and Women Inclusion within the Treasury Department, Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Securities & Exchange Commission and the Federal Reserve System. Rep. Waters' amendment is explicit: "Each agency shall take affirmative steps to seek diversity in the workplace of the agency, at all levels of the agency." That sounds like quotas all but in name. And although these offices formally wouldn't be vested with enforcement powers, once can be sure that the Justice Department, the Equal Employment Opportunity Commission and other federal agencies will - and won't hesitate to flex their muscle.
Civil rights leaders, possessed of the notion that lenders have an obligation to lower standards of risk to boost homeownership rates among blacks, are complaining the new provisions don't go far enough. They want the proposed diversity offices to wield regulatory oversight over lending institutions, not just promulgate standards. "This is absolutely necessary," said National Urban League President Marc Morial of punitive sanctions. "The evidence shows we haven't overcome discrimination or the need to promote diversity or inclusion." He added, ominously: "We have to make sure this agency has teeth."
Morial has it all wrong. It was discrimination on behalf of racial minorities by Congress and a series of presidential administrations (most of all, those of Bill Clinton and George W. Bush) that left banks, thrifts, mortgage bankers, Fannie Mae, Freddie Mac and major brokerage houses dangerously exposed. Rarely did anyone in either major party challenge the idea that for a bank to turn down a minority borrower, however spotty the credit score, is to deprive that person of his or her civil rights. Moreover, evidence over the years shows that nonwhites do exhibit higher incidences of default and foreclosure. Economists Richard Anderson (Jersey City State College) and James VanderHoff (Rutgers University-Newark), examining a data base of active conventional mortgages during 1986-92, concluded that black households have higher marginal default rates, even when controlling for borrower and property characteristics. The Department of Housing and Urban Development looked at more than 240,000 loans insured by the Federal Housing Administration (Note: FHA is part of HUD) and underwritten during 1992-99, and found that whites, blacks and Hispanics had respective default rates of about 4 percent, 11 percent and 13 percent. More recently, in a lengthy 2007 report to Congress, the Federal Reserve System Board of Governors concluded that non-Hispanic whites and Asians posed lower risks of default than blacks and Hispanics.
It isn't as if the natural opposition has remained silent to the potential for the new legislation to put mortgage lenders in harm's way. "Under the Waters provision," noted Rep. Ed Royce, R-Calif., "financial regulators will be required to assess the diversity policies' of every single institution they oversee, including every credit union and community bank." These offices, he complained. "will again lead to regulators shifting their focus away from systemic risks and safety and soundness. This time it will be toward racial and gender lending when inspecting the institutions they oversee." Sen. Richard Shelby, R-Ala., Ranking Minority Member of the Senate Banking, Housing and Urban Affairs Committee and also a conferee, similarly argued that making exceptions for minority neighborhoods defeats the very purpose of reform, which is to protect American consumers against systemic risk. But Sen. Dodd and Rep. Frank would hear nothing of it. "The same arguments were made against the Community Reinvestment Act," retorted Dodd, blind to the irony that aggressive CRA enforcement (often at the behest of nonprofit anti-poverty groups such as ACORN) helped create the meltdown his bill is trying to undo.
Racial and ethnic egalitarianism led to the 2008 financial system meltdown and Temporary Asset Relief Program (TARP) bailout. But don't expect too many white members of Congress, terrified of being publicly tarred with the label "racist," to admit as much. The Senate is expected to take up the bill after the July 4 recess. If they pass it with the proposed affirmative action standards intact, it's as good as signed by President Obama. The definition of insanity, observed Einstein, is doing the same thing over and over again, and expecting different results. In that spirit, this racially-driven credit allocation gambit is insane. It richly deserves a filibuster.